Still Missing The Washout

We all know that great buying opportunities come when there is a complete washout.  This happens when investors throw in the towel and want nothing to do with stocks anymore.  The closest thing we’ve had to that recently was the Tuesday morning after the Martin Luther King Jr. Day holiday.  That Tuesday, the Fed made an emergency cut in interest rates and the market still opened down over 500 Dow points.  It managed to rally that day but there was a ton of fear.  That’s the type of washout needed to get rallies where we can actually make some good money with stocks.  The indices subsequently rallied about 10% from the lows to the highs.  Many stocks were up over 20%. 

For the past two weeks, it seems at 2:00 CST, Charlie Gasparino of CNBC comes on television with “Breaking News” about how the bond insurers will get bailed out.  Low and behold, traders panic and cover their short positions ramping stock prices up.  It continues to happen.  This sounds contrarian, but we really need several 200-400 point down days on the Dow in a row to get that complete washout.  Otherwise, you can have rallies but it doesn’t really lead to much unless your extremely nimble.

This is definitely a contrarian view but when there’s extreme optimism (like in commodities lately), you have to protect yourself and look what would make you sell.  Conversely, when there’s extreme pessimism, there are bargains out there.  Right now, based on several of my indicators, I think we’re still in the middle.  Not too happy, not too scared. 

Given that, nibbling on some really good stocks is ok as long as you’re hedged with a short (best to use an ETF for most investors) on the overall market.

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